As China revives stock intervention, foreign funds lose patience

An investor checking stock information at a brokerage house in Yangzhou, China on Jan 5, 2016.
An investor checking stock information at a brokerage house in Yangzhou, China on Jan 5, 2016. PHOTO: REUTERS

BEIJING (BLOOMBERG) - China's latest efforts to rescue its stock market are driving away some of the world's biggest investors.

Policymakers revived intervention in the US$6.5 trillion (S$9.29 trillion) market this week, as state-controlled funds bought equities on Tuesday (Jan 5) and the securities regulator signalled a selling ban on major investors will remain beyond its Jan 8 expiration date, according to people familiar with the matter.

The measures to combat a 7 per cent sell-off at the start of 2016 follow unprecedented intervention to prop up shares during a US$5 trillion rout last summer.

While the manoeuvres may stabilise the market temporarily, they are unnecessary because intervention creates price distortions and fosters moral hazard as traders come to view the government as a backstop for shares, according to UBS Wealth Management, Henderson Global Investors and Wells Fargo Funds Management.

With the median stock on Chinese exchanges trading at the highest valuation among major markets, all seven strategists and fund managers surveyed by Bloomberg last month said they had expected regulators to let the six-month selling restriction lapse.

"I'm disappointed that they continued to use these sorts of quantitative controls," said Mr Jorge Mariscal, the emerging-markets chief investment officer at UBS Wealth Management, which oversees US$1 trillion. "These sorts of measures are going to backfire."

The government resumed intervention this week after a US$590 billion rout sparked by weak manufacturing data and local investor concern that an end to the selling ban would weigh on the market.

The China Securities Regulatory Commission asked bourses verbally to tell listed companies that the ban will stay in effect until the introduction of a new rule restricting sales, said the people. Listed companies were encouraged by regulators to issue statements saying they are willing to halt such sales, they said.

Introduced in July during the height of a US$5 trillion rout, the ban on selling has applied to investors with holdings exceeding 5 per cent in a single stock, along with corporate executives and directors. The restriction has locked up about 1.1 trillion yuan (S$240.6 billion) of holdings, according to Goldman Sachs.

Lifting of the ban will have a limited impact on the market because not all of the major shareholders need to reduce their stakes, the regulator's spokesman Deng Ge said in a statement on Tuesday. In recent years, about 60 per cent of the share sales from large holders have been done via block trades or transfer agreements that have less impact on the market, he said. The regulator will soon announce an improved mechanism for investors to reduce big holdings, Mr Deng added.

Until this week, the government had been removing market-support measures imposed during last year's equity rout, including resuming initial public offerings in December. Policymakers have said freer markets are integral to their plans to make the country's growth more sustainable. They've also worked to lure foreign investors to help professionalise a market where individual investors drive more than 80 per cent of trading.

Those efforts have been thwarted in part by state meddling. International investors have sold about 51 billion yuan (S$11.15 billion) of Shanghai shares through the city's exchange link with Hong Kong since China first stepped up its intervention in early July, according to data compiled by Bloomberg. Investors withdrew HK$463 million (S$85.3 million) from the two largest exchange-traded funds that track mainland stocks in Hong Kong in December, after taking out HK$5.4 billion during the previous month, data compiled by Bloombergshow.

"The Chinese government took a real hit to their credibility when implementing bans like that because that's not really rolling out the welcome mat to foreign investors," said Mr Brian Jacobsen, chief portfolio strategist at Wells Fargo Advantage Funds. "It's quite costly for them to continuously intervene in the markets because it does not do a lot to instill trust that the prices are actually reflecting fundamentals."

While the rescue measures put in place over the summer did help to calm the Chinese market - volatility has fallen by more than half since the ban started and the Shanghai Composite Index has rebounded 12 per cent from its August low - they have also left valuations trading at some of the world's highest levels.

Even after the retreat on Monday, the median stock on mainland exchanges trades at about 65 times earnings - more than three times higher than the median multiple of 18 for NYSE Composite Index companies. The Shanghai Composite, which has a heavy weighting in low-priced bank and energy shares, is valued at 17 times.

"International investors remain a bit skeptical of the A- share market," said Mr Andrew Gillan, the Singapore-based head of Asian equities excluding Japan at Henderson Global Investors, which oversees about US$124 billion. "It's not trading on fundamentals."